Spurred by the global commodities boom, China futures exchanges have been growing at a rapid pace, providing opportunities for quant fund managers both onshore and abroad.
UK-based Winton Capital Management, Europe’s biggest managed futures firm with $28.5 billion in AUM, is the first major overseas player to team up with a Chinese partner for an onshore commodity trading advisor (CTA) fund.
Its Hong Kong-based subsidiary, Winton Capital Asia, has partnered Shanghai-based Fortune SG Fund Management for a Chinese managed futures fund. Under an agreement announced in September, Winton will act as a research consultant to Fortune SG, a joint venture between Lyxor Asset Management and Baosteel Group.
Fortune recently launched a renminbi-denominated CTA fund of an undisclosed size that focuses on China’s futures markets. It is available only to sophisticated mainland investors such as institutions and high-net-worth individuals.
Man Group, which runs $60 billion in assets – of which $16.3 billion is attributable to quant strategy AHL – is seeking a similar collaboration. “We are definitely exploring opportunities with a Chinese partner,” says Tim Wong, chief executive of AHL, based in London. He adds that no timeframe has been set.
“For us, a particular angle would be that we want to find partners that ideally will not only serve us in terms of local CTA funds but also for the wider Man business as well,” says Wong.
The attraction of China for overseas CTAs is the liquidity and large trading volumes on mainland futures markets.
“As a CTA, we trade in the world’s most liquid markets and the liquidity of both futures and some OTC derivatives in [Asia] have been growing,” says Wong. “China has a larger futures volume than even the US.”
However, as a foreign player Man cannot yet access the market. “It’s something that we are definitely watching,” says Wong.
The China Securities Regulatory Commission has hinted that international participation into domestic Chinese futures markets may be permitted, although it is not known when.
In the meantime, domestic onshore CTAs are helping to usher in and attune mainland investors to the strategy.
“The home-grown industry often plays a very large role in any kind of financial market development,” says Wong, and that includes the integration of CTAs into China’s overall fund industry.
“There has been an increasing number of managed futures and quantitative strategies being launched,” says Rebekah Pang, Asia-Pacific head of capital introductions at Newedge.
Some domestic CTA traders are not only active in mainland markets but also in the US through accounts with foreign brokerages.
The activity of mainland traders in overseas markets was highlighted with the $1.5 million landmark fine imposed on Shanghai-based Sheenson Investments in September by the US Commodity Futures Trading Commission for exceeding federal limits on speculative bets in soybean oil and cotton futures.
The little-known onshore CTA was founded in 2005 by Weidong Ge – a former trader at Chinese state-owned agriculture trading company Cofco – who is believed to be running billions of yuan in AUM.
However, unlike Sheenson, domestic managers generally tend to be small, sometimes trading less than $20 million. They use managed account structures rather than formal funds and attract non-institutional investors, such as high net worth individuals.
China’s moves to establish a formal regulatory framework for onshore hedge funds, known on the mainland as ‘sunshine private trust funds’, would help to foster the domestic CTA market, say industry observers.
There are hopes within the quant industry that China may one day match or surpass Japan – Asia's biggest market for CTAs – in terms of interest and allocations to the strategy.
“Over the years, we have seen increased interest in managed futures strategies from the onshore investors we work with,” says Pang at Newedge.
*A full version of this article will appear in the November print edition of AsianInvestor.